Growth options effect on leverage: Evidence from China

Qi Lin

Pacific-Basin Finance Journal, 2015, vol. 34, issue C, 152-168

Abstract: Using the market-to-book assets (MB) ratio and its inverse exponential transformation as proxies for growth options, we find that the growth options effect on leverage is negative and highly convex in China, consistent with the U.S. evidence from Ogden and Wu (2013). Of particular importance, using a nonlinear transformed rather than a linear MB ratio yields stronger explanatory power for the growth options effect on leverage in tests of both static and dynamic trade-off theories. Moreover, we show that the growth options effect on leverage is stronger among firms characterized by wider divergence between control rights and cash-flow rights of the largest ultimate owner and firms that face more severe financial constraints.

Keywords: Growth options effect on leverage; Trade-off theory; Market-to-book assets ratio; Ownership structure; Financial constraints (search for similar items in EconPapers)
JEL-codes: G31 G32 G34 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:34:y:2015:i:c:p:152-168

DOI: 10.1016/j.pacfin.2015.07.004

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